Source: Boiling Frogs Post
William Engdahl
Since
around October last year, the price of crude oil on world futures
markets has exploded. Different people have different explanations. The
most common one is the belief in financial markets that a war between
either Israel and Iran or the USA and Iran or all three is imminent.
Another camp argues that the price is rising unavoidably because the
world has passed what they call “Peak Oil”—the point on an imaginary
Gaussian Bell Curve at which half of all world known oil reserves have
been depleted and the remaining oil will decline in quantity at an
accelerating pace with rising price.
The
Commodity Futures Modernization Act of 2000 (CFMA) was drafted by the
man who today is President Obama’s Treasury Secretary, Tim Geithner.
The CFMA in effect gave over-the-counter (between financial
institutions) derivatives trading in energy futures free reign, absent
any US Government supervision, as a result of the financially
influential lobbying pressure of the Wall Street banks. Oil and other
energy products were exempt under what came to be called the “Enron
Loophole.”
Current
estimates are that speculators, that is futures traders such as banks
and hedge funds who have no intent of taking physical delivery but only
of turning a paper profit, today control some 80 percent of the energy
futures market, up from 30 percent a decade ago. CFTC Chair Gary
Gensler, perhaps to maintain a patina of credibility while his agency
ignored the legal mandate of Congress, declared last year in reference
to oil markets that “huge inflows of speculative money create a
self-fulfilling prophecy that drives up commodity prices.” [2] In early March, Kuwaiti Oil MinisterMinister
Hani Hussein said in an interview broadcast on state television, “Under
the supply and demand theory, oil prices today are not justified.”[3]
# # # #
William Engdahl
‘The Key Oil Derivatives Insiders are Laughing All the Way to the Bank’
Since
around October last year, the price of crude oil on world futures
markets has exploded. Different people have different explanations. The
most common one is the belief in financial markets that a war between
either Israel and Iran or the USA and Iran or all three is imminent.
Another camp argues that the price is rising unavoidably because the
world has passed what they call “Peak Oil”—the point on an imaginary
Gaussian Bell Curve at which half of all world known oil reserves have
been depleted and the remaining oil will decline in quantity at an
accelerating pace with rising price.
Both the war danger and peak oil
explanations are off base. As in the astronomic price run-up in the
Summer of 2008 when oil in futures markets briefly hit $147 a barrel,
oil today is rising because of the speculative pressure on oil futures
markets from hedge funds and major banks such as Citigroup, JP Morgan
Chase and most notably, Goldman Sachs, the bank always present when
there are big bucks to be won for little effort betting on a sure
thing. They’re getting a generous assist from the US Government agency
entrusted with regulating financial derivatives, the Commodity Futures
Trading Corporation (CFTC).
Source: oilnergy.com
Since the beginning of October 2011,
some six months ago, the price of Brent Crude Oil Futures on the ICE
Futures exchange has risen from just below $100 a barrel to over $126
per barrel, a rise of more than 25%. Back in 2009 oil was $30.
Yet demand for crude oil worldwide
is not rising, but rather is declining in the same period. The
International Energy Agency (IEA) reports that the world oil supply rose
by 1.3 million barrels a day in the last three months of 2011 while
world demand increased by just over half that during that same time
period.Gasoline usage is down in the US by 8%, Europe by 22% and even
in China. Recession across much of the European Union, a deepening
recession/depression in the United States and slowdown in Japan have
reduced global oil demand while new discoveries are coming online daily
and countries like Iraq are increasing supply after years of war. A
brief spike in China’s oil purchases in January and February had to do
with a decision last December to build their Strategic Petroleum Reserve
and is expected to return to more normal import levels by the end of
this month.
Why then the huge spike in oil prices?
Playing with ‘paper oil’
A brief look at how today’s “paper
oil” markets function is useful. Since Goldman Sachs bought J. Aron
& Co., a savvy commodities trader in the 1980’s, trading in crude
oil has gone from a domain of buyers and sellers of spot or physical oil
to a market where unregulated speculation in oil futures, bets on a
price of a given crude on a specific future date, usually in 30 or 60 or
90 days, and not actual supply-demand of physical oil determine daily
oil prices.
In recent years, a Wall
Street-friendly (and Wall Street financed) US Congress has passed
several laws to help the banks that were interested in trading oil
futures, among them one that allowed the bankrupt Enron to get away with
a financial ponzi scheme worth billions in 2001 before it went
bankrupt.
The
Commodity Futures Modernization Act of 2000 (CFMA) was drafted by the
man who today is President Obama’s Treasury Secretary, Tim Geithner.
The CFMA in effect gave over-the-counter (between financial
institutions) derivatives trading in energy futures free reign, absent
any US Government supervision, as a result of the financially
influential lobbying pressure of the Wall Street banks. Oil and other
energy products were exempt under what came to be called the “Enron
Loophole.”
In 2008 during a popular outrage
against Wall Street banks for causing the financial crisis, Congress
finally passed a law over the veto of President George Bush to “close
the Enron Loophole.” And as of January 2011, under the Dodd-Frank Wall
Street Reform act, the CFTC was given authority to impose position caps
on oil traders beginning in January 2011.
Curiously, these limits have not yet
been implemented by the CFTC. In a recent interview Senator Bernie
Sanders of Vermont stated that the CFTC doesn’t “have the will” to enact
these limits and “needs to obey the law.” He adds, “What we need to do
is…limit the amount of oil any one company can control on the oil
futures market. The function of these speculators is not to use oil but
to make profits from speculation, drive prices up and sell.”[1]
While he has made noises of trying to close the loopholes, CFTC
Chairman Gary Gensler has yet to do so. Notably,Gensler is a former
executive of, you guessed, Goldman Sachs. The enforcement by the CFTC
remains non-existent.
The role of key banks along with oil
majors such as BP in manipulating a new oil price bubble since last
Autumn, one detached from the physical reality of supply-demand
calculations of real oil barrels, is being noted by a number of sources.
A ‘gambling casino…’
Current
estimates are that speculators, that is futures traders such as banks
and hedge funds who have no intent of taking physical delivery but only
of turning a paper profit, today control some 80 percent of the energy
futures market, up from 30 percent a decade ago. CFTC Chair Gary
Gensler, perhaps to maintain a patina of credibility while his agency
ignored the legal mandate of Congress, declared last year in reference
to oil markets that “huge inflows of speculative money create a
self-fulfilling prophecy that drives up commodity prices.” [2] In early March, Kuwaiti Oil MinisterMinister
Hani Hussein said in an interview broadcast on state television, “Under
the supply and demand theory, oil prices today are not justified.”[3]
Michael Greenberger, professor at the
University of Maryland School of Law and a former CFTC regulator who
has tried to draw public attention to the consequences of the US
Government’s decisions to allow unbridled speculation and manipulation
of energy prices by big banks and funds, recently noted, “There are 50
studies showing that speculation adds an incredible premium to the price
of oil, but somehow that hasn’t seeped into the conventional wisdom,”
Greenberger said. “Once you have the market dominated by speculators,
what you really have is a gambling casino.” [4]
The result of a permissive US
Government regulation of oil markets has created the ideal conditions
whereby a handful of strategic banks and financial institutions,
interestingly the same ones dominating world trade in oil derivatives
and the same ones who own the shares of the major oil trading exchange
in London, ICE Futures, are able to manipulate huge short-term swings in
the price we pay for oil or gasoline or countless other petroleum-based
products.
We are in the midst of one of those
swings now, one made worse by the Israeli saber-rattling rhetoric over
Iran’s nuclear program. Let me go on record stating categorically my
firm conviction that Israel will not engage in a direct war against Iran
nor will Washington. But the effect of the war rhetoric is to create
the ideal backdrop for a massive speculative spike in oil. Some analysts
speak of oil at $150 by summer.
Hillary Clinton just insured that the
oil price will continue to ride high for months on fears of a war with
Iran by delivering a new ultimatum to Iran on the nuclear issue in talks
with Russian Foreign Minister Lavrov, “by year’s end or else…” [5]
Curiously, one of the real drivers of
the current oil price bubble is the Obama Administration’s economic
sanctions recently imposed on oil transactions of the Central Bank of
Iran. By pressuring Japan, South Korea and the EU not to import Iranian
oil or face punitive actions, Washington has reportedly forced a huge
drop in oil supply from Iran to the world market in recent weeks, giving
a turbo boost to the Wall Street derivatives play on oil. In a recent
OpEd in the London Financial Times, Ian Bremmer and David
Gordon of the Eurasia Group wrote, “… removing too much Iranian oil from
the world’s energy supply could cause an oil price spike that would
halt the recovery even as it does some financial damage to Iran. For
perhaps the first time, sanctions have the potential to be ‘too
successful,’ hurting the sanctioners as much as the sanctioned.”
Iran is shipping 300,000 to 400,000 a
barrels a day less than its usual 2.5 million barrels a day, according
to Bloomberg. Last week, the US Energy Information Administration said
in a report that much of that Iranian oil isn’t being exported because
insurers won’t issue policies for the shipments.[6]
The issue of unbridled and
unregulated oil derivatives speculation by a handful of big banks is not
a new issue. A June 2006 US Senate Permanent Subcommittee on
Investigations report on “The Role of Market Speculation in rising oil
and gas prices,” noted, “…there is substantial evidence supporting the
conclusion that the large amount of speculation in the current market
has significantly increased prices.”
The report pointed out that the
Commodity Futures Trading Trading Commission had been mandated by
Congress to ensure that prices on the futures market reflect the laws of
supply and demand rather than manipulative practices or excessive
speculation. The US Commodity Exchange Act (CEA) states, “Excessive
speculation in any commodity under contracts of sale of such commodity
for future delivery . . . causing sudden or unreasonable fluctuations or
unwarranted changes in the price of such commodity, is an undue and
unnecessary burden on interstate commerce in such commodity.” Further,
the CEA directs the CFTC to establish such trading limits “as the
Commission finds are necessary to diminish, eliminate, or prevent such
burden.”[7]
Where is the CFTC now that we need
such limits? As Senator Sanders correctly noted, the CFTC appears to
ignore the law to the benefit of Goldman Sachs and Wall Street friends
who dominate the trade in oil futures.
The moment that it becomes clear that
the Obama Administration has acted to prevent any war with Iran by
opening various diplomatic back-channels and that Netanyahu is merely
trying to use the war threats to enhance his tactical position to horse
trade with an Obama Administration he despises, the price of oil is
poised to drop like a stone within days. Until then, the key oil
derivatives insiders are laughing all the way to the bank. The effect of
the soaring oil prices on fragile world economic growth, especially in
countries like China is very negative as well.
F. William Engdahl is author of A Century of War: Anglo-American Oil Politics in the New World Order. He is a contributing author at BFP and may be contacted through his website at www.engdahl.oilgeopolitics.net where this article was originally published.
Endnotes:
[1]Morgan Korn, Oil Speculators Must Be Stopped and the CFTC “Needs to Obey the Law”: Sen. Bernie Sanders, Daily Ticker, March 7, 2012, accessed in http://finance.yahoo.com/blogs/daily-ticker/oil-speculators-must-stopped-ctfc-needs-obey-law-182903332.html
[2] Ibid.
[2] Ibid.
[3] UpstreamOnline, Kuwait’s
oil minister believes current world oil prices are not justified,
adding that the Gulf state’s current production rate will not affect its
level of strategic reserves, 12 March 2012, accessed in http://www.upstreamonline.com/live/article1236944.ece
[4] Peter S. Goodman, Behind Gas Price Increases, Obama’s Failure To Crack Down On Speculators, The Huffington Post, March 15, 2012, accessed in http://www.huffingtonpost.com/peter-s-goodman/gas-price-increase_b_1346035.html
[5] Tom Parfitt, US ‘tells Russia to warn Iran of last chance’ , The Telegraph, 14 March 2012, accessed in http://www.telegraph.co.uk/news/worldnews/middleeast/iran/9142688/US-tells-Russia-to-warn-Iran-of-last-chance.html
[6] Steve Levine, Obama administration brushes off oil price impact of Iran sanctions, Foreign Policy, March 8, 2012, accessed in http://oilandglory.foreignpolicy.com/posts/2012/03/08/obama_administration_brushes_off_oil_price_impact_of_iran_sanctions
[7] F. William Engdahl, ‘Perhaps 60% of today’s oil price is pure speculation’, Global Research, May 2, 2008, accessed in http://www.globalresearch.ca/index.php?context=va&aid=8878.
